Harry Reid, Mitch McConnell Continue to Talk Payroll Deal

With time and patience running short, Senate leaders are talking about compromise on payroll tax holiday and unemployment insurance extensions, giving hope for a deal even though the differences between Democrats and Republicans remain wide.

The bipartisan urge to go home for Christmas appeared to change the game for Senate leaders today, and it became increasingly clear that Congress soon would approve a sweeping appropriations bill, leaving only the extension package standing between many Members and Ronald Reagan Washington National Airport.

Senate Majority Leader Harry Reid (D-Nev.), Minority Leader Mitch McConnell (R-Ky.) and their staffs are in talks to resolve the roadblocks for each party in the catchall payroll tax bill. The two Senate leaders met with Speaker John Boehner (R-Ohio) Wednesday evening, and the result of that session appears to be a strategy of having the Senate work out a bipartisan package to send to the lower chamber.

How Reid and McConnell will walk the bipartisan tightrope effectively enough to ensure House passage is not yet clear. Several sources tracking the talks indicated Democrats were seeking changes to or elimination of the House’s jobless provisions, the offset structure and environmental-based policy riders that would ease regulations for paper mills and chemical manufacturers.

To extract those concessions, Democrats have withdrawn their demands for a millionaires surtax. But Republicans have scoffed at the gesture, saying the provision has repeatedly failed in the Senate and certainly would not pass the House.

On the other hand, some Senate Republican aides suggested party leaders could agree on straight extensions of the payroll tax cut at its current rate — Democrats had hoped to deepen the current cut and expand the tax break to employers — as well as a clean extension of unemployment insurance benefits. Sources also suggested that negotiators could consider adopting legislative text that would ensure that the payroll tax holiday would have a more definitive end, making it more difficult to extend in the future.

Tax cuts and unemployment insurance benefits historically have not been offset, but most sources said those provisions will likely need to be paid for with cuts or revenue increases elsewhere.

On the floor today, Reid and McConnell had one of the more friendly exchanges they’ve had in weeks, the first public sign of a thaw in talks that were not only frozen, sources say, but had never even started.

“We’ve been in useful discussions about how to wrap this session up,” McConnell said. “We hope to be able to pass a combination of appropriation bills, and we are working hard to resolve the remaining differences on the payroll tax extension and the related issues that are important to both sides.

“We’re confident and optimistic we’ll be able to resolve both on a bipartisan basis,” the Minority Leader added.

Reid noted that he believed leaders could “come up with something that would get us out of here at a reasonable time in the next few days.”

The two biggest obstacles to that departure appear to be both sides’ willingness to make concessions on payfors and the Keystone pipeline project.

Democrats, especially those with D.C. interests, have been vocal in their opposition to enacting a three-year pay freeze on federal workers and narrowing the federal workforce as a way to offset the payroll tax holiday and other provisions. And the Democrats’ proclivity toward using savings from the drawdowns in the wars in Iraq and Afghanistan has been slammed by Republicans as gimmicky. Sen. John Cornyn (R-Texas) called such savings “phony” today.

Cornyn, a member of GOP leadership, said today the bill would have to be offset. Even though unemployment benefits were passed without offsets as recently as last year, he said, “we are in a new day. Nobody believes that the unemployment problem is going to get any better over the next year, and we have a huge debt overhanging.”

Sen. Chuck Grassley (R-Iowa) said he could support a bill for which the tax cut was not paid but the spending provisions were offset.

Meanwhile, Republicans refuse to budge on the Keystone issue, emboldened by the president’s public opposition to it. The measure has united GOP Members, especially those who are reluctant to support any sort of government spending bills. And the debate over the pipeline has put Democrats in a pickle: If they get much of what they want, an expansion of both jobless benefits and the payroll tax cut at current levels, would they give?

White House Press Secretary Jay Carney stopped short of saying the president would veto the payroll tax measure over the Keystone pipeline today.